What is Negative Cash Flow and How to Handle It

What causes negative cash flow?

By definition, negative cash flow is caused by spending more than you’re bringing in. But how does a business get to this point? There are various ways to end up this situation.

Poor budgeting

Poor budgeting is the most common cause of negative cash flow. If you don’t have a clear understanding of your business’s financial situation, it will be a challenge to manage your cash flow effectively.  

Low revenue

Low revenue can lead to negative cash flow as it limits the amount of money coming into your business. This makes it challenging to pay suppliers, employees, and other expenses. Without sufficient revenue, a business may need to borrow money to cover costs, which can make the problem worse in the future.

High fixed expenses

High fixed expenses can lead to negative cash flow by consuming a large portion of your business’s revenue, which may leave little cash on hand for other expenses. Fixed expenses, such as rent or equipment costs, can be challenging to reduce quickly.

Unexpected expenses

Unexpected expenses can lead to negative cash flow by draining your business’s cash. If you haven’t set aside funds for unexpected expenses, you find yourself experiencing negative cash flow as the unexpected expenses eat up your income.

Consequences of negative cash flow.

Negative cash flow can make it difficult for your business to pay its bills and suppliers on time. Having outstanding balances with suppliers can be stressful and ultimately damage your relationship with your vendors. If your business is unable to pay its bills and suppliers, it risks having its goods or services cut off.

Negative cash flow will make it more difficult to find loans. Lenders will be more hesitant to lend money to a business without positive cash flow since they will be nervous about getting paid back. Even if you can find a loan, it will often have a higher interest rate than it would have it you had positive cash flow since the lender will view your loan as being riskier.

Businesses, like individuals, have credit scores. Late payments, missed payments, and high levels of debt can all negatively impact a business’s credit score. A poor business credit history can also lead to higher interest rates on loans. Lenders will want to review your business cash flow statement when making lending decisions.

If negative cash flow goes on for too long, it might lead to bankruptcy or the closure of your business. 

Strategies for fixing your cash flow.

If you are experiencing negative cash flow, you’ll need to take steps to get back to positive.

The first step is to work on increasing your revenue. This should be done by evaluating your current sales and marketing efforts and looking for areas of improvement. If this isn’t an area of expertise for you, you may want to reach out to professional marketing firms. 

You’ll also want to evaluate your current expenses and see if there are areas where you can cut costs. Fixed expenses such as rent and utilities are often hard to change quickly, but variable costs such as staffing and product purchases can be adjusted. You should also check with your vendors to see if there are any discounts available.

If increasing revenue or cutting expenses aren’t options or won’t get you to a positive cash flow in the near future, you should consider obtaining financing. There are various types of financing available to small businesses. You can get a short-term loan with fixed payments or variable payment options which are based on a percentage of your revenue. A long-term loan is an option if you suspect it will take your business longer to get back on its feet or if you want a lower payment amount. A business lender can help you sort through your financing options.

If you are regularly running into negative cash flow situations, you should reevaluate your budgeting and forecasting. You’re likely not accounting for all the items that affect your business. You should also reevaluate your cash reserve to ensure you had funds available so that unexpected expenses are manageable.

Final thoughts

Negative cash flow can be frustrating for any business, but by carefully managing your expenses, working to maximize your revenue, and ensuring that you are prepared for unexpected outflows, you can minimize the chance that negative cash flow will be a problem for your business.

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_{Information provided on this blog is for educational purposes only, and is not intended to be business, legal, tax, or accounting advice. The views and opinions expressed in this blog are those of the authors and do not necessarily reflect the official policy or position of Lendio. While Lendio strives to keep its content up-to-date, it is only accurate as of the date posted. Offers or trends may expire, or may no longer be relevant.}